When searching for ways to become free of worrying about money, it is important to know where you stand today. Sometimes the hardest part about taking control of your finances is starting in the first place. I understand personally that it can be downright discouraging when you actually add up all of the debt that you have. This debt could be credit card debt, student loans, medical expenses, and everything in between. However, I can assure you that getting the process started of becoming financially free will be the best decision that you will ever make.
I started my financial freedom journey at a very young age, and I am still early on in it. I was 19 years old and in college when I decided that I didn’t want to work for the next 40 years of my life. I wanted to have the freedom to pursue a life of helping and educating others without being burdened about worrying if my next paycheck would come on time.
This led me to accessing my own financial situation at 19 years old and it looked like this: I didn’t have any student loans because I had an amazing scholarship that paid for my college tuition, room & board, etc. I purchased a Jeep Cherokee that I had to max out my credit cards for on the down payment (obviously a very bad decision, but I didn’t know that at the time), which left me with $5,000 in additional credit card debt with a $12,100 auto loan. My fiancee at the time was also in college and had about $2,000 in credit card debt, $33,000 in student loans, and $4,000 in unpaid medical expenses. This was all with an income of about $2,500 a month between the both of us.
As you can see our situation wasn’t the best, but it wasn’t the worst either. We were always conscience of not going “too far” down the rabbit hole even though we tested its depth quite a few times. With that being said, we started out climb through the stages of financial freedom that I will discuss below.
I am going to take you through each of the 6 stages, how you can work towards getting from each stage to the next one, and what stage I am at in my young journey for financial freedom.
The Six Stages of Financial Freedom
Before the actual first stage of financial freedom, you must get through a critical stage of dependence on others. This is the starting block. Everyone goes through this stage because don’t just come out the womb making money. I include this stage at the very beginning and it doesn’t count as an official numbered stage, but it is vital that you get to a point that you are self reliant before beginning your journey for freedom.
Stage 0 – Dependence
You are spending more than you earn, and you rely on support financially from others.
In this stage, you are almost completely dependent on others to supplement your living expenses. This stage is especially popular in high school students and new college students, but don’t stress if you are later on in your life and you’re still in stage. You can begin to take control of your finances by finding a source of income that can support your living expenses entirely.
We all start here. Even when I got to college and started making money on my own, I had to call my mom for money because I was poor at managing my finances. Before any of us are educated financially, we have the tendency to spend as much as we have, and then some. This leads us to digging a hole deeper and deeper each month, that our future self will have to climb out of. The longer you stay here the longer it will take to go through the other stages of financial freedom.
A quote by one of my favorite investors of all time is, “The most important thing to do if you find yourself in a hole is to stop digging.” -Warren Buffett
Stage 1 – Solvency
Your spending is equal to your expenses. You have just enough money to get from month to month.
In this stage, you are basically living from paycheck to paycheck. This stage is popular among a lot of people. It is not a terrible thing to be in the solvency stage because at least you are able to be independent from outside financial help. The only problem with being in this stage is that you’re never making progress towards freedom.
As a young college student, I was in this stage for the majority of my undergraduate career. I would get a paycheck, then buy pretty much everything I could, and then make the minimum payments on those cards for a while. I no longer needed help financially, but I was digging myself in a deeper hole because I now had interest payments to worry about.
The quickest way to get out of this stage and on to the next stage is by finding a way to reduce your expenses. A lot of the time we spend money unnecessarily, whether it eating out 5 times a week or on unused subscription services. Finding a way to reduce your expenses will go a long way once you realize that you can reach freedom much quicker by being a little more frugal.
Stage 2 – Stability
In this stage, you have established an emergency fund, repaid all of your consumer debt, and have some money left over at the end of each month.
Depending on how far you went down the rabbit hole, this stage can take a very long time to overcome. In my personal situation, it took me about two years to pay back all of my consumer debt on our small college income. (Consumer debt are things like credit card debt, auto loans, personal loans medical expenses, etc. This does not include student loans and mortgages.) In fact, I am still making payments on some of my medical expenses even though I consider myself to be passed the stability stage.
The best way you can get to stage is have a laser focus on paying back your debt. This means to cut out almost all unnecessary spending so that you can pay back your debt as quick as possible. This is important because you want to pay the least amount of interest possible to keep more money in your pocket.
I wrote an article about what order you should pay your debt back here: Why Dave Ramsey’s “Snowball” Method is Inefficient
This is the stage that I am currently at in my life.
Stage 3 – Agency
Final “survivial stage”, in this stage you have eliminated all of your debts, including mortgage and student loans, and have enough money invested so that you could quit your job if you wanted to.
This stage takes a very long time as well because of the amount of money that must be paid back. The most important thing is to stay diligent throughout the entire process so that you can move on to the next stage as quickly as possible.
Stage 4 – Security
In this stage, you have enough money coming in from your investment to cover your basic survival needs. You could live on this money only if you spend the bare minimum each month.
This stage is excellent because now you no longer have to worry about whether or not you will be able to afford food each month. Without a mortgage or a large debt payment to worry about, you can live life a little more freely and begin to pursue things that truly make you happy.
Stage 5 – Independence
In this stage, your investment income covers your current standard of living.
This is the goal for many, many people, including me at some point. Where I can have the option to quit my job and continue living the same lifestyle with much more time on my hands. At this point, people tend to be content with their freedom journey, and rightfully so. However, there is still one last stage after Financial Independence.
Stage 6 – Abundance
Your investment income gives you enough money to live the lifestyle that you want and then some. This level of freedom gives you the ability to do whatever you want.
In this stage, we tend to see people sharing their wealth with others by donating money to charities and other organizations. At this point, you have enough money invested to cover your expenses for the rest of your life with the ability to begin setting other people up for financial freedom as well.
This stage is my end goal, so that I can share my future wealth to make the lives of others better. One of the best things that I can do is educate people about proper financial management so that we all can pursue of life of freedom.
Here’s a quick summary of the 6 stages of Financial Freedom:
- Stage 0 – Dependence, your income does not cover your expenses and you need help from others regularly
- Stage 1 – Solvency, you make just enough to get from month to month
- Stage 2 – Stability, you can start paying back consumer debts and begin establishing an emergency fund
- Stage 3 – Agency, you have paid back your mortgage and student loans and started an investment portfolio.
- Stage 4 – Security, your investment income covers your basic needs
- Stage 5 – Independence, your investment income covers all of your living expenses
- Stage 6 – Abundance, you have more money than you will ever need
If you enjoyed this article about the 6 stages of Financial Freedom, check out some of my other articles about investing and entrepreneurship on The Centennial Investor, and join our free Facebook group where I share my best investing practices with a team dedicated to learning more about being financially free.
As I am not a Certified Financial Adviser, any information that you read here is purely for educational and entertainment uses only. For professional legal advice, contact a CFA.